Global Investing

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Turkey’s inflation spike is here. And it is looking worse than expected.

Data today shows October inflation jumping 3.27 percent, well above forecast and the highest in nine years. Compare that to 1.8 percent at this time last year. Annual inflation is now running at 7.7 percent and makes the central bank’s end-year forecast of 8.3 percent look optimistic –most analysts reckon it will be closer to 10 percent. Inflation has in fact been rising steadily in recent months — a consequence of the runaway credit boom of the past year and a policy experiment which saw the central bank cutting interest rates in the face of an overheating economy and raising banks’ reserve ratios instead. Add in the pass-through from the lira’s big depreciation since August and a jump in inflation is hardly surprising. The central bank has of late expressed some concern about inflation and used this to justify its actions to prop up the lira.

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The inflation vs. deflation debate has livened up again following the jump in December’s UK consumer price inflation (CPI) to 2.9 percent. Last year you couldn’t move for economists harping on about the output gap and blithely dismissing arguments about imported inflation, rising commodity prices, and oh yes, the little matter of the money supply.

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They keep telling us that the recession is over so maybe now’s the time to start worrying about inflation. That’s the view many wealthy investors are already taking, reasoning that a little bit of the yellow shiny stuff will provide some comfort as we start piling our cash into wheelbarrows to do the weekly groceries shop.

APPETITE TO CHASE?
- Equity bulls have managed to retain the upper hand so far and the MSCI world index is up almost 50 percent from its March lows. However, earnings may need to show signs of rebounding for the rally’s momentum to be sustained. Even those looking for further equity gains think the rise in stock prices will lag that in earnings once the earnings recovery gets underway, as was the case in past cycles. The symmetry/asymmetry of market reaction to data this week — as much from China as from the major developed economies — will show how much appetite there is to keep chasing the rally higher.

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BOND YIELDS
- Nominal bond yields have risen across the curve, while term premiums and fixed income volatility are higher in an environment of uncertainty about how central banks will exit from quantitative easing policies once recovery takes hold. Bonds have turned into the worst-performing asset class this year according to Citi and none of the factors which markets have blamed for this are about to disappear. Curve steepening seen in April/May has started to reverse and whether it continues is being viewed as a more open question than whether yields head higher still.

from Global News Journal:

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The recent run-up in oil prices could have further to go as most analysts are likely to begin raising their year-end oil price targets, according to market research firm Birinyi Associates in Stamford, Connecticut. "Given several considerably lower expectations, we think it is reasonable to expect upgrades," they said in a research commentary, noting that crude oil prices were already above most firms' year-end targets. U.S. front-month crude hit an intraday high of $73.23 on Thursday, the highest intraday level since prices hit $75.69 on Oct. 21. A year-end oil price target of note recently came from Goldman Sachs, which raised its end-of-2009 oil price forecast on June 4 to $85 a barrel from $65. Oil's climb partly reflects weakness of the U.S. dollar and expectations that demand may be picking up as the global recession abates.--- Graphic courtesy of Birinyi Associates, Inc.

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The recent spate of shark attacks on Australian beaches could mark a turning point in global deflation and signal a change in fortunes for some beleaguered emerging economies, if Nomura strategist Sean Darby is to be believed.